Why I Am Not Active In The Stock Market
Earlier today, I tweeted that I am probably the only personal finance enthusiast (note, I did not say guru. I am no guru, no one likes gurus) who is not a fan of the stock market. As I sent that tweet, I was listening a BBCWHYS episode where they were discussing the Chinese stock market meltdown. For the last 4 days, the Chinese market has lost about 20% of its value after a period of impressive growth that saw many ordinary Chinese citizens buying stocks. Most of these citizens have now lost their life savings.
Here in Kenya, we have had an eventful year for some of the counters in the Nairobi Securities Exchange:
- Uchumi’s meltdown. I guess we can call it that…
- Kenya Airways which posted a record Kshs 27 billion loss, and is currently angling for a taxpayer bail out to help sort out its cashflow problems.
- The Britam directors’ kerfuffle, which was closely followed by their having to restate their released financial statements which shaved off Kshs 342 million of its profits
- Recently listed Home Afrika struggled to raise a bond and resorted to taking a bank loan.
The Nairobi Securities Exchange has lost 17% of its value from January to date, which has seen its top investors lose Sh 17 billion.
While the above incidents are not indicative of what happens in stock markets, they do point to the reasons why I am not a fan of stock market investments and do not write about them here much. Before I get into my reasons, I would like to state that the stock market works and has created wealth for many people around the world. In fact, this is a good time to be buying shares in the NSE.
These are my personal reservations.
How much time are you willing to invest?
Creating sustainable wealth on the stock market requires a significant investment in time in learning. First, you have to to learn the basics of finance, how to read financial statements, how to interpret annual reports, how to value a company, and determine whether a particular share is undervalued or overvalued. Secondly, you have to then invest time to keep up with the company performance of your favourite counters, to decide whether to keep holding, sell or buy some more.
A shortcut to the above is to identify a few blue chip companies with growth prospects (some banks come to mind) and accumulate their shares over time with the hope that in the long term, you will make some money. Some people also outsource this learning to their brokers, and while it may work, I do not think brokers’ interests are aligned with an investors. See they make money when you trade shares, yet you only create wealth when you hold shares over time. Relying on brokers’ recommendations is likely to have you trading shares more than you should.
What level of control do you have?
It is no secret that some companies in the NSE have had suspicious operating practices in the past. We had CMC a couple of years back, and this year alone, we’ve seen the Uchumi CEO let go for inappropriate business conduct, and the Kenya Airways debacle. The common assumption is that as a shareholder, you are a part owner of the business. This assumption is false because true business ownership is not only about contributing capital, but also having some level of control on how that business is operated. How much control do you have as a minor shareholder in a publicly traded company? None. I am not comfortable with this, especially because should the company go burst, the shareholder has no recourse.
The need for a really long term view
Anyone who has created wealth through the stock market will tell you that you need a long term view to truly become wealthy. Speculators and traders may make some money, but it is not sustainable. If we are talking about building a retirement fund, it makes sense to buy stocks, otherwise, consider other avenues that are likely to give you a return in a shorter time, and that you can quickly sell without losing your investment.
In addition to the need for a long term view, you need to continuously have capital to invest in stocks, to take advantage of dips like what we are having now in the NSE. The reason the stock market doesn’t work for the Average Joe is that he may not have huge sums of money to take advantage of market slumps, or to keep investing to average out. The stock market slump will almost always coincide with high cost of living and low availability of cash.
Being an entrepreneur means you have alternative areas to invest other places you could lose your money.
I am a risk taker and I love businesses where I am in control and therefore take responsibility of losses if and when they happen. This means that for me, the stock market is not attractive. I do not want my money to be in places where I have no decision making control. I’d rather farm tomatoes and watermelon, though even in that I do make losses. So what do I invest in?
Short-medium term, I like government instruments for money I cannot afford to lose. When I want to take on a little risk I buy low/medium cost land with the aim to hold. Finally, I am actively investing in my farming business, and once in a while I wonder about my Kenya Airways shares 🙂
Are you a stocks investor?For how long have you been at it, and what has been your experience? Tweet me or comment below and let us discuss!
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